Chapter 27 : Economic Issues

Main stages of the business cycle

Growth

Boom

Recession

Slump

  • GDP rise
  • employment rise
  • price level rise
  • too much spending
  • inflation takes place
  • shortages of skilled labour supply
  • costs of production rise
  • future is uncertain
  • too little spending
  • GDP falls
  • fall in demand and profit
  • workers may be made redundant (cyclical unemployment)
  • longed recession
  • high level of unemployment
  • prices fall (to boost demand)
  • business may fail

Government economic objectives

Impact on businesses of changes in employment levels, inflation and GDP

changes in level of employment :

  • unemployment goes up, more supply of labour
  • ability of business to recruit new employees
  • customers may become unemployed, less willing to purchase from the business, sales fall
  • business that sell cheaper products or relatively inelastic products may be less affected

inflation :

  • business costs may increase
  • prices of products also increase, fall in sales
  • effect depend on what the business sells

GDP :

  • economy growing --> increase in GDP
  • increasing sales
  • more jobs, more income, more ability to buy
  • may be harder to recruit labour

low inflation :

  • prices rise slowly
    if rapid inflation :
  • real incomes fall
  • demand for higher wages
  • prices of goods and services will be higher inside the country than outside; may encourage import
  • business unlikely to expand and create more jobs
  • standard of living falls

low unemployment :

  • increase output (GDP)
  • improve the standard of living

if no economic growth ❌

  • output falls, fewer labour needed, unemployment rises
  • average standard of living falls
  • expansion of business may not be common as there may be short of finance

balance of payments

  • exports must be balance with imports
  • difference between exports and imports are balance of payments
    payment deficit (imports > exports) ❌
  • country can run out of foreign currencies and need to borrow
  • exchange rate may fall (exchange rate depreciation)

Government economic policies

fiscal policy : taxes and government spending
direct taxes :

  • income tax - may result in less sales if high
  • profits tax or corporate tax
    indirect tax :
  • VAT
  • import tariffs - may have more sales if high
    changes in government spending to fund :
  • education
  • health
  • defense
  • law and order
  • transport - roads and railways

monetary policy - interest rates :

  • may have to pay more interest
  • borrowing money for expansion may be delayed
  • relatively elastic PED businesses may suffer from falling sales as people don't want to borrow money
  • exchange rate appreciation

supply side policies

  • privatisation
  • improve training and education
  • increase competition in all industries